Ennismore Fund Management Ltd v Fenris Consulting Ltd (2016)


On the proper construction of a "clawback" agreement between a hedge fund and its fund managers, the hedge fund could claw back a discretionary bonus paid to an individual fund manager only if it could establish a causal link between the losses sustained by the funds for which that manager was responsible and a reduction in its own performance fee.


A hedge fund appealed against a decision of the Court of Appeal of the Cayman Islands that it was not entitled to "claw back" bonus fees it had paid to the respondent fund manager (F).

The hedge fund had employed F under a consultancy services agreement which required it to provide investment advice and to monitor any investments made pursuant to that advice. A substantial element of the remuneration paid by the hedge fund to its fund managers comprised a discretionary bonus based on the performance of the portfolios for which each fund manager was responsible. Pursuant to a "clawback" agreement, the hedge fund retained the right to claw back a portion of any bonus previously paid if a fund manager's portfolios under performed. Because of market conditions in 2007 and 2008, most of the hedge fund's portfolios, including those managed by F, suffered losses. The hedge fund therefore earned no performance fee in 2008. It sought to claw back F's bonuses, even though it had not established that the loss of its performance fee was attributable to F's advice. The Court of Appeal held that it was not entitled to claw back F's bonuses.

The hedge fund submitted that on a proper construction of the clawback agreement it could claw back a bonus if a fund manager's portfolio generated a loss, irrespective of whether it could establish that that particular loss had led to a reduction in its own performance fee. F submitted the hedge fund had to establish a causal link between the reduction in its performance fee and the loss-generating portfolio before it could exercise its clawback rights.


(1) Sentence A(ii) of the clawback agreement indicated that a bonus would be subject to clawback against "net investment losses attributable to the investment advice received by [the hedge fund] from [the fund manager]". Sentences B(1)(iii) and C(1)(iii) contained a formula for calculating the amount of clawback by reference to the "reduction in the performance fee earned by [the hedge fund] attributable to any net investment losses". The word "attributable" in each of those sentences described the causal link between the reduction in the hedge fund's performance fee and the net losses on the fund manager's portfolio. The reference to "net investment losses" in sentences B(1)(iii) and C(1)(iii) had to refer back to sentence A(ii) so as to mean net investment losses attributable to the investment advice given by the fund manager. Applying the principles in Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619, there was no justification for ignoring sentences B(1)(iii) and C(1)(iii). They were not inconsistent with the overall purpose of the agreement, and a reasonable person in the position of the parties would have given them their ordinary meaning, Arnold followed. Thus, the agreement expressly and unambiguously required that losses on a fund manager's portfolio had to have led to a reduction in the hedge fund's performance fees. If more than one fund manager generated a loss with the overall result that the hedge fund received a reduced performance fee, that reduction would have to be apportioned between the fund managers in proportion to their contribution to the loss. That construction was not absurd, extraordinary, unreasonable or contrary to commercial common sense. It meant that a fund manager would compensate the hedge fund only when the latter had suffered a clearly established loss attributable to the fund manager's bad advice. However, the hedge fund had not established what proportion of its loss was attributable to the losses on F's portfolio. There had been no course of dealing between the parties that could have prepared them for the problems which befell the markets in 2008, when most of the fund managers earned nothing. Before then, the hedge fund had only twice clawed back bonuses, and it had not had to address the question of whether it could exercise the clawback right when it had suffered no loss attributable to the under performance of a particular portfolio (paras 21-38).

(2) There had been a delay of some 21 months between the hearing of the appeal and the delivery of the Court of Appeal's judgment. In the absence of some exceptional justification, such delay was wholly unacceptable. It was important that the Court of Appeal should deliver judgment as soon as reasonably practicable after a hearing (para.39).

Appeal dismissed